McDermott - Newsletters - IP Update, Vol. 10, No. 2, February 2007

The U.S. Court of Appeals for the Federal Circuit, in a rare interlocutory appeal, found the district court lacked supplemental jurisdiction under 35 U.S.C. §1367 to entertain a claim for infringement of a foreign patent. After the patent owner brought suit for infringement of its U.S. patent, it moved for and was granted leave to amend to add allegations of infringement of related foreign patents. The Federal Circuit held that the district court abused its discretion in granting leave to amend. Voda v. Cordis Corp., Case No. 05-1238 (Fed. Cir., Feb. 1, 2007) (Gajarsa, J.; Newman, J., dissenting).

Voda obtained three U.S. patents from a common specification as well as four foreign patents that issued off of the corresponding Patent Cooperation Treaty (PCT) application. After bringing suit against Cordis for infringement of the three U.S. patents, Voda sought to amend its complaint to assert infringement of the four foreign patents. Voda did not add the foreign affiliates that were alleged to be infringing the foreign patents abroad. Cordis opposed the attempted amended on the grounds that the district court lacked subject matter jurisdiction under §1367(a) and (c). The district court, relying largely on Mars v. Kabushiki-Kaisha Nippon Conlux, granted Voda’s motion. Cordis sought relief by way of interlocutory appeal to the Federal Circuit.

The Federal Circuit first noted that exercise of supplemental jurisdiction to hear a claim for infringement of a foreign patent is unique to U.S. patent law and is thus governed by the law of the Federal Circuit. The Court then noted that the four factors set forth in Mars (difference in patents, differences in accused devices, difference in accused acts and differences in governing laws) do not supplant the “common nucleus of operative facts” test established by the Supreme Court. The district court’s failure to articulate its findings on all of the Mars factors and the Federal Circuit’s ability to entertain expert testimony at the appellate level, resulted in the Court not deciding the “common nucleus of operative fact” question. The Court noted that the district court’s opinion contained no §1367(a) analysis and that “considerations of comity, judicial economy, convenience, fairness, and other exceptional circumstances constitute compelling reasons to decline jurisdiction under §1367(c)….”

Judge Newman’s dissent took issue with the district court’s refusal to exercise jurisdiction simply because foreign law is implicated, noting the myriad of cases routinely resolved by U.S. federal courts that implicate foreign law. Judge Newman noted that the “panel majority strays from precedent, policy, and prudence, in ruling that the discretionary authority of the district court cannot or should not be exercised to resolve foreign patent disputes between parties properly before the court.”

Patents / Claim Construction

“Essential” Steps from Specification May Limit Scope of Patent Claims
By Matthew Cunningham

In construing the scope of a product claim, the U.S. Court of Appeals for the Federal Circuit held that the process for making a product can be within the scope of a product claim when the “patentee makes clear that the process steps are an essential part of the claimed invention.” Andersen Corp. v. Fiber Composites, LLC, Case Nos. 05-1434, 06-1009 (Fed. Cir., Jan. 26, 2007) (Bryson, J.).

Andersen asserted two groups of patents related to polymer-wood composites against Fiber Composites. The first group of patents (Group I) claim “composite compositions,” which are described in the patents as an intermediate composite materials capable of being extruded into structural parts. The second group of patents (Group II) claim “composite structural members,” which are described in the patents as the extruded parts themselves. Fiber Composites contended that these claim terms should be construed to include an intermediate pelletization process that is used to manufacture the composite invention. Since this limitation is not expressly contained in the claims themselves, Fiber Composites cited the specification to support its claim construction. Under this construction, Fiber Composites would escape infringement as it uses a direct extrusion process in which the polymer and wood fibers are first mixed and melted in an extruder and then, without an intermediate step, directly forced through a die to form the finished structural part.

The district court agreed with Fiber Composites’ construction in regard to the Group I patents, holding that “composite compositions” should be construed to include the pelletization process from which it is made. However in construing the Group II patents, the district court ruled that the scope of the “composite structural members” is limited to the extruded product and does not include the pelletization process. Fiber Composites appealed.

In reversing the district court’s grant of summary judgment for infringement of the Group II patents, the Federal Circuit found ample support for Fiber Composites’ proposed limitation by viewing the specification and the prosecution history together. The Federal Circuit construed the claims of both groups of patents to be limited to an intermediate pelletization process. The Court reasoned that, as in the case of the Group I common specification, the Group II common specification states that the claimed superior properties of the structural members are only achieved through the essential step of the intermediate pelletizing process. Thus, the Court reasoned that the pelletizing step is not merely a preferred embodiment, because the specification uses “language of requirement, not preference.”

Also, after reviewing the prosecution history of the Group II patents, the Court found that the applicants clearly disavowed the direct extrusion process for making the “composite structural members.” Just as during the prosecution of the Group I patents, the applicant distinguished prior art based on the intermediate pelletization process used in the present invention.

Practice Note: Patent prosecutors should use caution when using language of requirement (as opposed to preference) in the specification to describe the invention, as such language may be claim-limiting.

Patents / Claim Construction

Recapture Rule Pre-empts Ability to Rewrite Claims
By Astrid R. Spain

In a decision that centered on application of recapture rule in the context of claim construction, the U.S. Court of Appeals for the Federal Circuit vacated a district court’s grant of summary judgment of non-infringement of a patent relating to a hypodermic safety syringe. MBO Laboratories, Inc. v. Becton, Dickinson & Co., Case No. 06-1062 (Fed. Cir., Jan. 24, 2007) (Gajarsa J.).

MBO filed suit against Becton asserting infringement of claims 13, 19, 20, 27, 28, 32 and 33 of the U.S. Patent No. RE 36,885 (the RE ’885 patent). Claims 13, 19 and 20 were original to the patent; claims 27, 28, 32 and 33 were added during the reissue process. MBO’s primary reason for seeking reissue was that its claims could be interpreted to cover only backwards movement—“retraction”—of the claimed needle into a stationary guard and not the essentially equivalent act of pushing the guard forward while holding the needle still. MBO requested the U.S. Patent and Trademark Office (USPTO) to permit a broadening of the claims, replacing the term “retraction” with “relative movement” in order to more clearly capture embodiments in which the guard sleeve was moved forward. The USPTO allowed the reissue without objection. Based partly on the recapture rule, the district court construed the claims as being limited to “retraction,” negating the expansion of claim scope permitted by the USPTO.

The recapture rule is a limitation on the ability of patentees to broaden their patents after issuance. If the reissue application is filed within two years of the patent’s initial issuance and the patentee “through error without any deceptive intention … claim[ed] … less than he had a right to,” the reissue patent’s claims may be broader than the original patent’s claims. The recapture rule excludes earlier deliberate withdrawals and amendments from the allowable scope of a reissue patent.

The Federal Circuit concluded that the district court had erred in the first instance by applying the recapture rule to rewrite the claims in order to preserve validity, essentially undoing the change that the USPTO had permitted. According to the panel, validity construction should be used only as a last resort, not as a first principle. The panel pointed out that MBO explicitly stated in reissue its intent to broaden the scope of its patent coverage by rewriting its claims to cover all relative movement, not just retraction. In light of these clear statements in the prosecution history of the reissue patent, the Court noted it was compelled to give effect to MBO’s stated intent to broaden the coverage of its claims. The Court noted that, whether those broadened claims are invalidated by the recapture rule is an issue separate from construction, noting that “in the narrowly limited appellate posture of this case, only the question of infringement, not validity, is before us."

Patents / Claim Construction

"About" Doesn't Get Around Limitations Imposed by Intrinsic Evidence
By Astrid R. Spain

The U.S. Court of Appeals for the Federal Circuit recently affirmed a district court’s grant of summary judgment of non-infringement based on a claim interpretation of “about” in reference to a numerical ratio. Ortho-McNeil Pharm. Inc. v. Caraco Pharm. Labs., Ltd., Case No. 06-1102 (Fed. Cir., Jan. 19, 2007) (McKinney, C.J. of S.D. Ind., by designation).

Ortho-McNeil Pharmaceutical, Inc. owns a patent that relates to a pharmaceutical composition comprising certain weight ratios of the analgesics tramadol and acetaminophen marketed as Ultracet®. Ortho filed suit after Caraco filed an Abbreviated New Drug Application (ANDA) for a generic version of Ultracet®, which included a paragraph IV certification with respect to the Ortho patent. Caraco’s ANDA requested approval for a formulation containing tramadol and acetaminophen with an average weight ratio of tramadol to acetaminophen of 1:8.67 and requiring a weight ratio of no less than 1:7.5. Ortho alleged that Caraco’s proposed formulation infringed claim 6 of the its patent, which is directed to “a pharmaceutical composition comprising a tramadol material and acetaminophen, wherein the ratio of the tramadol material to acetaminophen is a weight ratio of about 1:5.”

The only claim construction dispute between the parties was the meaning of the phrase “about 1:5.” The term “about” is used in all of the claims of the patent to modify the weight ratios claimed therein. Caraco argued that the proper construction of “about 1.5” was “approximately 1:5, subject perhaps to minor measuring errors of, say, 5 or 10%.” Ortho argued that the proper construction is “approximately 1:5, and … encompasses a range of ratios of at least 1:3.6 to 1:7.1.” On Caraco’s motion for summary judgment of no infringement, the district court essentially followed Ortho's claim construction, but found that Caraco’s ANDA formulation did not literally infringe Ortho patent (the ’691 patent). Invoking the doctrine of claim vitiation, the district court also found no infringement under the doctrine of equivalents. The district court concluded that finding infringement by Caraco’s formulation with an average weight ratio of 1:8.67 would render meaningless the “about 1:5” limitation. Ortho appealed.

Commencing its review with claim construction, the Federal Circuit relied on intrinsic and extrinsic evidence to determine that the district court had not erred in construing the term “about 1:5” to mean “approximately 1:5, encompassing a range of ratios no greater than 1:3.6 to 1:7.1.” In reaching this determination, the Federal Circuit noted that “[t]he intrinsic evidence points to a meaning for the term ‘about 1:5’ that is narrow because the 1:5 weight ratio, along with the 1:1 weight ratio, is distinctly claimed and distinguished from other broader weight ratios in the patent.” In particular, the Court noted that, because some of the claims in Ortho’s patent recite a single weight ratio and some claims recite ranges of weight ratios, “one of ordinary skill in the art would understand the inventors intended a range when they claimed one and something more precise when they did not.”

With regard to the district court’s decision to grant summary judgment of non-infringement, the Federal Circuit first determined that under the proper claim construction, “there can be no literal infringement because Caraco’s formulation must have a weight ratio of tramadol to acetaminophen of no less than 1:7.5.” Then, turning to the issue of infringement under the doctrine of equivalents, the Federal Circuit agreed with the district court that to expand the weight ratio of “about 1:5” to encompass a composition having an average weight ratio of 1:8.76 “would eviscerate the limitation.”

Patents / Litigation

Federal Circuit Precludes Follow-On Suit Against Users of Infringing Device
By Paul E. Poirot

As a general proposition, a patent owner need not sue all infringers at the same time; different infringers may be pursued individually (or in groups) in multiple suits. However, the U. S. Court of Appeals for the Federal Circuit recently explained that judicial doctrines such as claim preclusion can prevent a patent owner from suing separate infringers successively. Transclean Corp. v. Jiffy Lube International, Inc. et al., Case No. 06-1077 (Fed. Cir., Jan. 18, 2007) (Plager, S. J.).

In prior litigation, Transclean, the exclusive licensee of a patent directed to an automatic transmission fluid changing machine, asserted its patent against Bridgewood, which manufactured and sold infringing machines. In that case, Transclean won a motion for summary judgment of infringement. Transclean then brought infringement actions against Jiffy Lube and about 30 other fast-lube businesses that had bought infringing machines from Bridgewood. Apparently, Bridgewood failed to pay the judgment against it.

Transclean filed a motion for summary judgment against the defendants in the new litigation, asserting that Jiffy Lube was precluded by the doctrine of issue preclusion from asserting a non-infringement defense against Transclean because the Bridgewood litigation concluded with a judgment of infringement by the accused machines. The trial court denied Transclean’s motion.

Jiffy Lube filed its own motion for summary judgment, asserting that Transclean was precluded under the doctrine of claim preclusion from suing Jiffy Lube. In ruling for Jiffy Lube, the court held that the elements of claim preclusion were satisfied: the Bridgewood litigation ended with a final decision on the merits, the district court had proper jurisdiction, the litigation in both cases involved the same cause of action and Jiffy Lube was in privity with Bridgewood. Moreover, Transclean conceded that, during the Bridgewood litigation, it was aware that Jiffy Lube had bought and was using Bridgewood’s infringing machines.

On appeal the Federal Circuit held that the plaintiff may not pursue litigation against users of an infringing product where the plaintiff had already won an infringement suit against the manufacturer of the allegedly infringing product, and (in the earlier suit) had argued that the manufacturer and its users were in privity for the purposes of issue preclusion.

The Federal Circuit focused on the third and fourth elements of claim preclusion. As to the third element, Transclean argued that litigation against infringing users involves a different cause of action than litigation against an infringing manufacturer and seller. The Federal Circuit rejected this distinction because both lawsuits involved the same patent and the same infringing machines.

As to the fourth element, Transclean argued that the users of the infringing machine were not in privity with the infringing manufacturer and seller. The Federal Circuit noted that typically a manufacturer or seller of a product who is sued for patent infringement is not in privity with a party who purchases and uses the product. However, the Court did not reach the question of privity on its merit, instead it found that Transclean was estopped from even making the argument because (in the earlier suit) Transclean argued in its motion for issue preclusion that they were in privity.

Practice Note: The claim preclusion/issue preclusion holdings in this case are based on the unusual facts. Typically a patent owner is able to pursue separate claims against manufacturers, sellers and users of allegedly infringing devices until it receives full recovery for the infringement somewhere along the distribution channel.

Patents / Infringement / Inducement

Requisite Proof of Inducement to Infringe Step-Based Method Claims
By Amanda Koenig

Addressing whether a plaintiff had presented evidence sufficient to overcome defendants’ motion for summary judgment of non-infringement, the U.S. Court of Appeals for the Federal Circuit outlined the required elements to support a claim of inducement to infringe under §271(b), where claim language contains steps that refer to the results of the previous step. E-Pass Technologies, Inc. v. 3Com Inc., Case Nos. 2006-1356, -1357, -1358 (Fed. Cir., Jan. 12, 2007) (Linn, J.).

The plaintiff, E-Pass, is the owner of patent that claims “a method and device for substituting a single electronic multifunction card for multiple credit cards.” Claim 1, the only independent claim, describes “[a] method for enabling a user of an electronic multi-function card to select data from a plurality of data sources” and recites a number of steps, some of which must be performed by the end-user/consumer.

E-Pass sued a number of personal digital assistant (PDA) manufacturers, alleging, inter alia, that the defendants had induced consumers to practice claimed the steps on their PDA devices. The plaintiff’s evidence of infringement consisted of documents illustrating the defendants’ interest in PDA-based payment technology, plans for a contactless payment demonstration in Cartes, France, business analyses of proposed contactless payment protocols and excerpts from the accused devices’ product manuals—none of which showed use of all the claimed steps or even performance of the steps in the required order.

Defendants moved for summary judgment of non-infringement. The district court granted the motion on the basis that plaintiff “had failed to adduce sufficient evidence to support a finding that any of the defendants or their customers had practiced all of the steps of the claimed method.” Without evidence of direct infringement, the plaintiff was unable to prove induced infringement. E-Pass appealed.

The Federal Circuit affirmed. Specifically, the Federal Circuit held that a plaintiff must establish that the defendant induced someone to perform all of the steps of the claimed method in the necessary order and in the United States. Moreover, distinguishing Moleculon Research v. CBS, the Federal Circuit held that a showing that a defendant teaches each of the claimed steps in isolation does not suffice. In particular, the Federal Circuit focused on the fact that unlike the general purpose PDAs in issues (devices that might, in isolation, perform one or more of the claimed steps), the accused device in Moleculon “was intended to be used in only one way—to practice the infringing method—and that method was explicitly taught by the proffered instructions”.

Patents / Interference

Provoking Interference Proceeding Gives Rise To Waiver of Eleventh Amendment Immunity
By Kenneth L. Cage

In a decision addressing a state’s waiver of constitutional immunity under the Eleventh Amendment, the U. S. Court of Appeals for the Federal Circuit held that by initiating and participating in a contested interference proceeding before the U.S. Patent and Trademark Office (USPTO), the Curators of the University of Missouri waived its constitutional immunity in an ensuing civil action for judicial review. Vas-Cath, Incorporated v. Curators of the University of Missouri, Case No. 06-1100 (Fed. Cir., Jan. 23, 2007) (Newman, J.).

A patent interference proceeding is a procedure conducted before the USPTO to determine which of (two or more) competing inventions is entitled to priority of invention. In this case, the University patent application was filed first, even though the Vas-Cath application was the first to issue as a patent by the USPTO. In response, the University copied claims from the Vas-Cath patent, thereby provoking a patent interference. After a six-year interference proceeding, the USPTO awarded priority of the invention to the University.

Under the provisions of 35 U.S.C. § 146, Vas-Cath appealed the USPTO determination to the district court where the University asserted Eleventh Amendment immunity to the federal suit. Relying on the Ninth Circuit Quileute Indian Tribe v. Babbitt decision, the district court held that there was no waiver of immunity under the Eleventh Amendment by the University. In Quileute, the Ninth Circuit held that a prevailing tribe had not waived its immunity to a subsequent court action by participating in an administrative proceeding. Vas-Cath appealed.

The Federal Circuit reversed. While the Court concurred that the University cannot be sued in federal court without its consent, the Federal Circuit found that University voluntarily participated in a federal administrative forum whose action was statutorily reviewable in federal court. While the University’s participation in the federal patent system does not waive immunity, the Federal Circuit relied upon the University’s recourse to the USPTO tribunal for adjudication of the claim of prior inventorship and patent ownership to deny the University Eleventh Amendment immunity from suit.

According to the Federal Circuit, the University’s initiation and participation in the interference proceeding before the USPTO not only waived the University’s constitutional immunity under the Eleventh Amendment in the interference proceeding, but also in an appeal taken by the losing party to the interference.

Patents / Interferences

Deposition Practice in Interference Proceedings Clarified
By Cameron Weiffenbach

In a recent decision on a motion to exclude evidence, an expanded panel of Administrative Patent Judges of the U. S. Patent and Trademark Office Board of Patent Appeals and Interferences (the Board) took the opportunity to address what constitutes proper deposition practice under the Cross Examination Guidelines appended to the Trial Section’s Standing Order of January 3, 2003. Pevarello v. Lan, Pat. Interf. No. 105,394 (P.T.O. Bd. Of Pat. Appeals and Interf., Jan. 12, 2007). The USPTO Guidelines were based on a 1993 district court decision, in Hall v. Clifton Precision.

In an interference proceedings, direct testimony is presented to the Board either by affidavit or declaration. Cross-examination is by way of deposition testimony. The Board almost never conducts a hearing with live testimony in an interference proceeding. Decisions by the Board in interference proceedings are based on the written record.

Lan filed a motion to exclude evidence because of cross-examination violations by defending counsel for Pevarello. In its motion, Lan suggested that “the Patent Bar needs clarification as to whether … [certain action] falls inside or outside … the [Board] Guidelines.” Based on Lan’s request, the expanded Board panel took the opportunity to address deposition practice under the Cross-Examination Guidelines, probably because of practices experienced in this and other interference proceedings. The Board’s opinion showed that there are significant differences between deposition practice in USPTO proceedings as compared with federal and state court proceedings.

First, counsel using a “blanket” objection in defending a witness will not prevail in any motion to exclude evidence, even if the parties agree to use of “blanket” objections. The Guidelines require that each objection “must include the legal basis for the objection.” Among the suitable legal basis cited in the opinion, are “hearsay,” “document not authenticated,” “leading question” or “beyond the scope of the direct testimony.” While not specifically mentioned in the opinion, more than likely objections such as “lack of foundation” and “asked and answered” would also be acceptable.

Second, defending counsel must refrain from judging or objecting to the clarity of a question asked of the witness. If a question is “ambiguous, not clear or vague,” it is the witness who must ask for clarification, not defending counsel. Further, if the witness responds to a statement made by opposing counsel where no question has been asked, it would be improper to move to strike or otherwise object because no question was asked.

Third, an objection that the witness’s testimony has been “mischaracterized or misstated” is inappropriate. According to the Board, “[i]t is up to the witness to inform questioning counsel that the witness’s testimony has been mischaracterized or misstated” and that defending counsel should “clear up the ‘misstatement’ on redirect.”

Fourth, the Board made it clear that “there is no objection under our rules or the Federal Rules of Evidence based on the ‘form of the question’” and that an “objection to the form of the question should not be made in patent interference cases” (emphasis supplied).

Fifth, if there are disagreements between counsel during the deposition, the deposition should be suspended and a phone call placed to the judge.

Sixth, questions regarding the preparation of the witness’s affidavit or declaration—such as who prepared it, the number of drafts, who suggested changes, number of meetings and what was discussed at the meetings—are, according to the Board opinion, “a waste of time, both for the witness and the Board.” No matter how the affidavit or declaration was prepared, once it is signed, the Board will presume that “the witness agrees with the content.”

Practice Notes: In addition to what is obvious from the above, when preparing a witness for deposition testimony in an interference proceeding, instill in the witness the importance of not speaking until a question has been posed. Witnesses must also understand that it is their job to inform examining counsel when prior testimony is being misstated or misrepresented. Also, witness should be sensitive to consider each question carefully and, if any term in any question posed is ambiguous in any way, to ask for clarification. Remind the witnesses that, in the absence of another ground of objection that may be proper under the Cross-Examination Guidelines, he will be bound by any answer given.

Trademarks / Res Judicata

Federal Circuit Affirms Refusal to Register Bose Speaker Shape (Again)
By Philip Canelli

The U.S. Court of Appeals for the Federal Circuit recently affirmed the Trademark Trial and Appeal Board’s refusal to register Bose’s speaker design mark pursuant to the doctrine of res judicata, based on the Court’s earlier refusal to register as functional Bose’s previous application for the same mark. In re Bose Corp., Case No. 06-1173 (Fed. Cir., Feb. 8, 2007) (Lourie, C.J.),

In 1977, Bose Corporation filed a trademark registration for a “loudspeaker systems” design. In 1985, the Federal Circuit deemed the “substantially pentagonal shape” and a “bowed” “front edge” of the speaker design to be functional and unregistrable because it was a superior design. See In re Bose Corp., 772 F.2d 866 (Fed. Cir. 1985) (hereinafter, “Bose I”). More than 20 years later, Bose re-applied to register a design of a pentagonal-shaped speaker enclosure. Bose acknowledged that the “new” speaker enclosure is identical to the mark deemed functional in Bose I. Bose attempted to distinguish the new enclosure based on a modification of its written description as having a “curved front edge” as opposed to the “bowed front edge” in the proposed mark in Bose I. The USPTO, however, has once again, refused registration based res judicata and because the proposed mark remains functional.

Bose did not dispute that the same applicant previously applied to register the same trade dress at issue and that there was a final judgment on the merits, i.e., the functionality of the identical design. Thus, the general prerequisites for res judicata were satisfied. Nonetheless, Bose argued that the circumstances have changed and were not considered in the prior proceeding such that application of the res judicata is not appropriate.

Bose first argued that res judicata does not apply because the Federal Circuit did not explicitly consider the “curved front edge” of the Bose design in its functionality analysis. Relying on the substantial identity of the drawings of the marks in each application, the Federal Circuit rejected Bose’s contention that, simply because the written description of the mark in the second application described the enclosure as having a “curved front edge,” it somehow constitutes a different case. The Federal Circuit further noted that the picture of the design at issue in Bose I depicts the same curved edge as the design in the present application. Noting that this feature remained the same as in the earlier litigation, the panel concluded that the modified description of the curved front edge in the present application was insufficient to foreclose res judicata.

Bose also contended that the post-Bose I Supreme Court case TrafFix represents a change in the law and sets forth additional considerations in the functionality analysis. For support, Bose cited a passage in TrafFix that states “where a manufacturer seeks to protect arbitrary, incidental or ornamental aspects of features of a produce found in the patent claims, such as arbitrary curves in the legs or an ornamental pattern pained on the springs, a different result might obtain. There the manufacturer could perhaps provide that those aspects do not serve a purpose within the terms of the utility.” Therefore, according to Bose, TrafFix mandates consideration of its curved front edges as “arbitrary, incidental, or ornamental aspects or features’ of the mark.” The Court concluded that Bose’s reliance on TrafFix is misplaced because it is applying for protection on the entire pentagonal-shaped design rather than just the curved front edges. The Federal Circuit also held that Bose’s focus on the advertising materials, which do not promote the utilitarian aspects of the curved front edge, was irrelevant because the Bose’s design is not merely limited to the curved front edges, but includes the entire pentagonal-shaped design.

Trademarks—Priority / Use in Commerce

Use in Commerce Must be Lawful In Order to Acquire Priority
By Terry W. Ahearn

Addressing whether use in commerce must be lawful in order to establish trademark priority, the Ninth Circuit, in a case of first impression, adopted the U.S. Patent and Trademark Office (USPTO) policy that “only lawful use in commerce can give rise to trademark priority.” To be lawful, a use must be compliant with federal labeling requirements. CreAgri, Inc. v. USANA Health Sciences, Inc., 2007 U.S. App. LEXUS 866 (9th Cir., Jan 16, 2007) (Hawkins, J.).

CreAgri began using the OLIVENOL mark in 2001 on dietary supplements. At the time, the active ingredient in CreAgri’s product was not capable of being accurately measured. Although CreAgri could have applied for an exemption from Food and Drug Administration (FDA) labeling restrictions, it did not do so. However, CreAgri twice changed the label, indicating the content of the active ingredient in OLIVENOL. Meanwhile, the USPTO, when examining CreAgri’s application to register its OLIVENOL mark on the principal register, noted that OLIVENOL is the German word for “olive oil,” and that the product contained no olive oil. The USPTO therefore denied registration on the principal register on the basis that the mark, as applied to the goods, was deceptively misdescriptive. CreAgri amended its application to one for registration on the supplemental register and CreAgri’s OLIVENOL mark was so registered.

Meanwhile, USANA obtained a 2002 date for its application to register its OLIVEOL mark for use on vitamins, minerals and nutritional supplements. That application matured to a registration on the principal register.

CreAgri sued USANA for trademark infringement based on CreAgri’s prior use in commerce of the mark OLIVENOL. USANA moved for summary judgment on the trademark claims and requested cancellation of CreAgri’s supplemental register registration in favor of USANA’s OLIVEOL principal register registration. The district court granted USANA’s motion for summary judgment, dismissing CreAgri’s claims and canceling CreAgri’s OLIVENOL registration. CreAgri appealed.

The Ninth Circuit, agreeing with the USPTO, found that CreAgri could establish priority over the OLIVEOL registration through “use in commerce.” However, adopting the long-standing USPTO policy that any “use in commerce” must be lawful, the court noted that CreAgri’s OLIVENOL product was, at all relevant times, inaccurately labeled and found CreAgri’s the use of its OLIVENOL mark was not lawful under federal labeling requirements.

CreAgri therefore argued that the nexus between the labeling violation and the use was too attenuated to justify the denial of priority, that FDA regulations provided an exemption making CreAgri’s use lawful and that the lawfulness of the use was not material. The Court rejected CreAgri’s arguments finding that the nexus between the labeling requirements and the use of the OLIVENOL was satisfied, that the FDA required CreAgri to apply for and be granted the exemption (CreAgri had not done either) and that the unlawful use of the OLIVENOL mark on every bottle sold prior to USANA’s priority date was material.

The Ninth Circuit thus upheld USANA’s motion for summary judgment on CreAgri’s trademark infringement claims and cancellation of the OLIVENOL mark from the supplemental register.

Copyrights / Defenses

Equitable Laches May Be Shorter Statute of Limitations Period
By Christine A. Pepe

Affirming in part and reversing in part the district court’s grant of summary judgment dismissing the plaintiffs’ copyright infringement claim under the equitable doctrine of laches, the U.S. Court of Appeals for the Sixth Circuit held that, depending on the nature of the relief sought and in compelling circumstances, the defense of laches may bar a copyright infringement claim (or certain remedies) even though that claim is brought within the three-year statute of limitations. Chirco v. Crosswinds Communities, Inc., No. 05-1715 (6^th Cir., Jan. 10, 2007) (Daughtrey, J.).

The plaintiffs brought suit against defendants for copyright infringement, alleging that defendants copied its architectural design for a condominium building complex. The plaintiffs sought monetary and injunctive relief, as well as the destruction of the buildings. The plaintiffs learned of defendants’ intention to build the allegedly infringing condominiums during discovery conducted in another copyright infringement lawsuit between the parties. The plaintiffs discovered the defendants’ plans for the project over a year before defendants publicly broke ground for the development. However, the plaintiffs waited nearly two-and-a-half years after first learning of defendants’ development plans to file the second lawsuit. At this time, of the 252 planned units, 168 had been constructed, 141 had been sold and 109 were already occupied. The district court granted summary judgment in favor of defendants, finding they had been prejudiced by the unnecessary delay between the time plaintiffs learned of the planned construction and the time the complaint was filed, even though the complaint was filed within the three-year statute of limitations provided by the Copyright Act, 17.

On appeal, the plaintiffs relied on the Fourth Circuit decision in Lyons Partnership, v. Morris Costumes (2001), arguing that separation of powers principles dictate that an equitable rule, such as laches, cannot bar claims that are brought within the legislatively prescribed statute of limitations. The Court acknowledged the split among the various circuits as to whether laches may bar an otherwise timely copyright infringement claim (as held in Lyons Partnership) versus the Ninth Circuit’s more expensive approach to equity as explained in Kling v. Hallmark Cards, (2000) and Danjaq v. Sony (2001). The Court, citing a non-copyright 6th Circuit case, Tandy v. Malone & Hyde (1985), adopted a “middle ground” that would allow for the application of laches in compelling and unusual cases. In analyzing whether undue prejudice would result to defendants, the Court drew an important distinction based on the relief sought, applying laches as to plaintiffs’ claim for the destruction of the buildings, but permitting plaintiffs’ claims for monetary relief and to enjoin future infringement to go forward.

Copyrights / First Sale Doctrine
Trademarks / Repackaging

Only Musical Recordings Eligible for Copyright First Sale Exception
By Sarah Brown

Addressing for the first time the issue of whether the record rental exception to the copyright first sale doctrine applies to all sound recordings or only musical sound recordings, the U.S. Court of Appeals for the Sixth Circuit upheld the district court, holding that only musical sound recordings are subject to the exception. Brilliance Audio, Inc. v. Haights Cross Communications, Inc., Case No. 05-1209, (6th Cir., Jan. 26, 2007) (Gibbons, J.; Kennedy, J., dissenting in part). The Court also discussed the first sale doctrine as it applies to trademark infringement.

The plaintiff sells audio books in two editions: one for the retail market and one for libraries. The defendants allegedly repackage and relabel Brilliance retail editions of audio books as Brilliance library editions and then rent, lease or lend them. The repackaged audio books still bear Brilliance’s trademark. Brilliance sued Haights for copyright and trademark infringement, dilution and unfair competition. Haights moved for dismissal for failure to state a claim, arguing that Brilliance’s claims were precluded by the first sale doctrine. The district court granted Haights’ motions. Brilliance appealed.

Brilliance argued that Haights’ actions were covered by the Copyright Act’s record rental exception to the first sale doctrine for sound recordings. Haights argued that the provision applies only to sound recordings of musical works, noting that the provision specifically references musical works. The Court began by noting that unless a statute is “inescapably ambiguous,” a court should not look to outside authority to interpret it. Here, as both parties presented plausible, but opposing, interpretations of the statute, the Court held that the statute was ambiguous. Thus, examining the legislative history of the rental record exceptions, the context in which it was passed and the policy rationale behind the provision, the Court agreed with Haights that the exception was only intended to apply to musical recordings, noting that Congress’s focus in passing the Record Rental amendment was to protect the music industry. When the exception was later extended, a committee report made it clear the exception was limited to musical works because only musical recordings were likely to be listened to repeatedly. Congress reasoned that rented or borrowed copies of musical recordings were therefore more likely to be copied at home for future play, potentially displacing record sales.

The Court conceded that Congress focus on musical works was not dispositive: “a statute can be written so as to cover not only present concerns, but also future concerns that Congress cannot foresee at the time of enactment.” However, the Court found that because the record rental exception upset the traditional bargain between copyright owners and those who buy copies of their works, it should be narrowly construed. Accordingly, the Court upheld the district court’s dismissal of Brilliance’s copyright claim. On this issue, Judge Kennedy dissented. In his opinion, the statutory text unambiguously covers all sound recordings.

On the other hand, the Court found that Brilliance’s complaint could support a trademark infringement claim. The Court said it was true that under the first sale doctrine, resale of an original trademarked item is generally neither trademark infringement nor unfair competition. The rationale for the rule is that trademark law is designed to prevent consumer confusion regarding product origin, which does not occur if a genuine article bearing a true mark is sold. However, the Court said that two exceptions to this doctrine exist: when notice that the item has been repackaged by the reseller is inadequate and when the alleged infringer sells goods that are materially different than those sold by the trademark owner. The Court found that Brilliance’s complaint sufficiently alleged both exceptions. Thus, the Court reversed the district court’s dismissal of the trademark claims.

Copyrights / Renewal Term

Court Confirms Constitutionality of Copyright Renewal Terms
By Natalie A. Ward

The U.S. Court of Appeals for the Ninth Circuit affirmed a district court dismissal of a constitutional challenge against the extension of copyright renewal terms (previously upheld by the Supreme Court in its 2003 decision in Eldred v. Ashcroft). Kahle et al. v. Gonzalez, Case No. 04-17434 (9th Cir., Jan. 22, 2007) (Farris, J.).

The plaintiffs constituted individuals and companies providing free internet access to a library of works, including digitized audio, books, films, web sites, ephemeral films and software. These so-called “orphan” works were of minimal or no commercial value but protected under the Copyright Renewal Act of 1992 (CRA) and the Sonny Bono Copyright Term Extension Act of 1998 (CTEA), which eliminated renewal requirements for works created between 1964 and 1977. The plaintiffs characterized this change as a conversion from an opt-in to an opt-out copyright system, which granted many of the “orphan” works an “effectively perpetual” copyright that precluded them from the public domain. The Court acknowledged that the renewal term extensions were most noticeable for such “orphan” works because those authors were in many case not ascertainable and were in any event unlikely to affirmatively renew the copyright. However, obtaining consent from such author use then “orphaned” works could prove overwhelming, difficult, expensive and often impossible.

The plaintiffs first argued here that the extended copyright term altered the “traditional contours” of copyright, thereby triggering review under the First Amendment. The Court noted that the CRA and CTEA eliminated renewal requirements, but explained that the purpose of these efforts was “simply [to] place existing copyrights in parity with those of future works.” Accordingly, the Court rejected the plaintiffs’ claim in view of the express affirmation by the Supreme Court in Eldred of the constitutionality of such efforts. Additionally, the Court cited fair use and the idea/expression dichotomy as “traditional First Amendment safeguards … sufficient to vindicate the speech interests affected by the CRA and CTEA.”

Secondly, the plaintiffs argued that the current, “effectively perpetual,” copyright term violated the constitutional framers’ meaning of the “limited times” proscription found in the Copyright Clause, which grants Congress the power “[t]o promote the progress of Science and Useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The Court found that Eldred effectively addresses this claim and stated “the [Supreme] Court has long defined ‘limited times’ by a balancing rather than absolute test.” The Court explained that Congress determines the “limited time” of copyright, subject to rationality review, by weighing the creative incentive of longer terms versus the public benefit of shorter terms.

The Court concluded that the plaintiffs merely sought, without any compelling rationale, to relitigate arguments rejected by the Supreme Court in Eldred and affirmed the lower court’s dismissal.

Patents / Antitrust

Two Federal Circuit Decisions Clarify Walker Process Antitrust Claims
By Joel R. Grosberg and Vincent C. van Panhuys

The U.S. Court of Appeals for the Federal Circuit recently decided two cases involving Walker Process antitrust claims. In one case the Court clarified the types of threats that could subject a fraudulent patent holder to Walker Process antitrust liability, holding that a patent obtained by fraud could lead to an antitrust violation in which the patent holder threatened to enforce the patent against the plaintiff’s customers, but made no enforcement threats directly against the plaintiff. Hydril Co. v. Grant Prideco LP, Case No. 2006-1188 (Fed. Cir., Jan. 25, 2007) (Friedman, Sr. J.; Mayer, J., dissenting).

In the other case, the Federal Circuit shed light on what conduct constitutes the fraud necessary to form the basis for a Walker Process claim. The Federal Circuit dismissed a Walker Process antitrust claim in which the patent holder’s omission to the Patent Office, while material and resulting in an unenforceable patent, did not rise to the level of fraud necessary to support a Walker Process claim. Dippin’ Dots, Inc. v. Mosey, Case Nos. 2005-1330, -1582 (Fed. Cir., Feb. 9, 2007) (Gajarsa, J.).

Walker Process refers to the1965 Supreme Court decision, Walker Process v. Food Machinery, which held that enforcement of a fraudulently obtained patent may violate Section 2 of the Sherman Act, which prohibits monopolization or attempted monopolization. Sherman Act violators are subject to civil suits for treble damages.

Threats Against Customers Constitute “Enforcement” For Purposes of Walker Process Claims

The Hydril case involved two competitors that manufacture the pipes used in drilling oil and gas wells and the connections for interlocking these pipes. Hydril alleged that Grant Prideco had fraudulently obtained a patent for such drill pipes by intentionally failing to disclose certain material prior art during the patent application process. Hydril further alleged that Grant Prideco then used threats to enforce this fraudulently procured patent by writing letters to distributors, customers and others in the industry that suggested that Grant Prideco “would act aggressively to challenge activities that it saw as potentially infringing.” Hydril’s complaint did not allege that Grant Prideco had threatened enforcement against Hydril directly. The district court dismissed the resulting Walker Process antitrust claim because Hydril had “failed to allege enforcement activity by Grant Prideco which would create a reasonable apprehension that Grant Prideco intended to enforce the … patent against Hydril.”

The Federal Circuit reversed, allowing Hydril to proceed with the antitrust claim. The Court reasoned that “a valid Walker Process claim may be based upon enforcement activity directed against the plaintiff’s customers. Threats of patent litigation against customers, based on a fraudulently procured patent, with a reasonable likelihood that such threats will cause the customers to cease dealing with their supplier, is the kind of economic coercion that the antitrust laws are intended to prevent.” The Court emphasized that the threat necessary for such an antitrust claim should be distinguished from the threat required to bring a declaratory judgment action for patent validity. As explained by the Federal Circuit in Microchip Technology Inc. v. The Chamberlain Group, in a patent validity declaratory judgment action, enforcement threats against the plaintiff’s customers alone would not be enough to avoid dismissal.

Even Omissions in the Patent Prosecution Process that Result in Unenforceability May Be Insufficient to Support Walker Process Claims for Fraud

In the Dippin’ Dots case, Dippin’ Dots held an exclusive license to a patent for the process of making, preserving and distributing ice cream “beads”. However, the applicant for the ice cream bead patent had failed to disclose certain sales of beaded ice cream that occurred before the critical date. When Dippin’ Dots subsequently brought patent infringement actions against Mosey (and others) who had started to manufacture and sell essentially the same product, Mosey claimed that the patent was unenforceable because it had been obtained by fraud. In addition, Mosey made Walker Process antitrust counterclaims. The district court determined that Dippin’ Dot’s exclusively licensed patent was unenforceable and that the plaintiffs had established a Walker Process claim. The district court also required Dippin’ Dots to pay the Mosey’s attorneys fees.

The Federal Circuit agreed that the patent applicant had committed “inequitable conduct” in failing to inform the USPTO of the on-sale prior art and that this was a sufficient basis to render the patent unenforceable. However, the Court concluded that there was insufficient evidence of the required “deceptive intent” to establish the fraud necessary to sustain a Walker Process antitrust claim. “To demonstrate Walker Process fraud, a claimant must make higher threshold showings of both materiality and intent than are required to show inequitable conduct.” Although the Court found the patent applicant’s omission to be sufficiently material to render the patent unenforceable, it ruled that the omission, by itself, was insufficient to establish the necessary level of fraudulent intent required to sustain a Walker Process claim.

Practice Note: The Hydril and Dippin’ Dots decisions underscore the close relationship between patent and antitrust law and help explain the parameters of that relationship. Those seeking to enforce a patent that was allegedly procured through fraud or inequitable conduct face potential treble damage antitrust liability. Those seeking to challenge a patent would be wise to consider if circumstances exist for a possible antitrust claim. For either, the Federal Circuit’s recent rulings provide significant guidance.

Patents / Standard-Setting

FTC Requires Rambus to License DRAM Technology
By April J. Tabor

As part of its first decision addressing participation in a standard-setting body, the U. S. Federal Trade Commission issued an order imposing penalties on Rambus for its misrepresentations and omissions of relevant information from a standard-setting body known as JEDEC. In the Matter of Rambus, Inc., Docket No. 9302 (F.T.C., Feb. 5, 2007).

In August 2006, the FTC found that Rambus had deliberately withheld from JEDEC (the standards setting body for computer memory), that it possessed patents covering the standard for SDRAM and DDR SDRAM while it participated in the development of the standards. The FTC held that Rambus’s subsequent assertion of these patents against SDRAM and DDR SDRAM manufacturers violated U.S. antitrust laws. Following this finding of liability, the FTC held further hearings and received additional evidence to assist it in determining an appropriate remedy.

The FTC order limits the royalty rates at which Rambus may license its patented technology to SDRAM and DDR SDRAM manufacturers (0.25 percent and 0.50 percent respectively). After three years, Rambus is prohibited from collecting any royalties for SDRAMs or DDR SDRAMs. The Commission also has ordered Rambus to employ an approved compliance officer to monitor Rambus’s participation in standard-setting organizations and ensure that Rambus discloses its intellectual property rights.

Although the majority found that the order restores competition, two Commissioners dissented, asserting that royalty-free licensing was the only relief adequate to restore competition. Moreover, they noted, as the SDRAM and DDR SDRAM technologies are nearly obsolete, any remedy that did not include the next generation of DRAM—DDR2 SDRAM—would be ineffective.

While the majority opinion concedes that royalty-free licensing may have been appropriate, the FTC found that Complaint Counsel failed to establish that royalty-free licensing was warranted because Complaint Counsel failed to demonstrate that the DRAM industry would have negotiated a royalty-free license for SDRAM and DDR SDRAM had Rambus not misled it.

Practice Note: Given the FTC’s approach in this case, plaintiffs appear to now have a higher burden to prove that the requested relief is appropriate and both parties have an increased incentive to obtain evidence of licensing rates for alternative technologies.

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IP Update, Vol. 10, No. 2, February 2007

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